Stable processes in econometric time series: Are prices made out of noise?

Allison, Andrew; Abbott, Derek
March 2000
AIP Conference Proceedings;2000, Vol. 511 Issue 1, p221
Academic Journal
If the rules that regulate a market allow speculation then prices in that market become volatile. It is possible to model the fluctuations in these prices as random variables. The empirical distributions of these random variables are unusual; they are distinctly non-Gaussian. They belong to a class of distributions called Le´vy stable distributions and have paradoxical properties. The processes that generate these unusual distributions must also have special properties. One possible hypothesis is that markets are self organized critical systems. The discussion provides a brief history of these ideas and identifies some of the unsolved problems in the application of the theory of the Le´vy process to economics. © 2000 American Institute of Physics.


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